A recent report fromForrester Research called contracts the "beating heart" of a business. "Contracts,"the report noted,"define the relationships that companies have with their customers, suppliers, partners, and employees."
For lawyers and the legal operations professionals that support them, this insight should get hearts pounding. Trained in law school 1L Contracts classrooms and finely honed in corporate boardrooms, corporate counsel pride themselves on being masters of business negotiation chess. As legal counsel, they know what they should fight for, what they can let slide, and what they can ignore; that's why most legal departments manage a company's large volume of contracts in-house and rarely outsource this work to outside counsel. It's also why legal department operations professionals (LDOs) spend considerable time thinking about how to leverage a new generation of business technology to streamline contract management across the organization—and get these critical documents out of people's inboxes and into the Cloud. (One recent survey put LDOadoption of contract lifecycle management (CLM) technologyat about 80%).
Finally, the humble contract, and the process to negotiate it, is getting the recognition and upgrade that it deserves.
Is Legal Living Up to the Task?
Even though legal is one of many "touches" in a contract's life cycle, its failure to be strategic and act as a valued partner to the business is a frequent criticism. Given legal's heavy involvement in the "beating heart" of an organization, it must evaluate if it is doing as much as it can to support the business through its negotiation of these documents.
- Does it understandwhatthe business needs from its contracts?
- Is it negotiating contracts that truly maximize the value of the business's relationships?
- Is it negotiating contracts that are fully aligned with the business?
In its recent"Most Negotiated Terms" report, World Commerce & Contracting (WCC) found that legal professionals, when negotiating a contract, focus more on clauses that protect the business from a potential failure than on facilitating success. The survey suggests that the contract language legal spends the most time negotiating is not the language that will significantly impact the commercial outcomes.
Does this mean lawyers have been focusing on the wrong thing?
No, risk management remains critical. But it does suggest opportunities for legal to expand its consideration of what makes a good contract a great one. With the help of LDOs, here are some recommendations for corporate counsel to transform themselves from being perceived as mere legal counselors to becoming strategic and valued partners to the business:
1. Consider adding "relational terms" to your templates and playbooks.
First, let's define a better contract. There is a growing recognition in contracting circles that "relational terms" should receive more attention when drafting agreements. WCC defines "relational terms" as terms that "help us adapt and adjust."
"They may include a more formal approach to the frequency and method of communications, or clearer definitions of data exchange, or greater rigor in defining the procedures for change management."
These relational clauses are:
"… essential to sustaining relationships, managing uncertainty, and securing improved performance."
Relational clauses look beyond how a contract relationship might end and focus on sustaining the relationship and creating optionality for the business when there's less certainty during the relationship.
The Forrester report cited above corroborates this. Among firms Forrester surveyed, 76% of firms with "mature" contract management programs focus on contracts as not only risk management tools but instruments with which their companies can create value.
2. Improve cross-functional alignment by prioritizing information flows and sharing.
Now you might be thinking, "Easier said than done." How can legal fully know what the business agreed to or what its delivery teams need to keep its relationships on track? If an organization's workflows exist in silos, the answer is, it can't.
Negotiating more valuable contracts requires cross-functional alignment—a core competency identified by CLOC. CLOC defines cross-functional alignmentas the ability to "create and drive relationships with other key company functions, such as HR, IT, Finance and Workplace Resources."
To facilitate complete alignment with the business, legal must gain full visibility upstream and downstream. LDOs should consider working across functions to get corporate counsel involved early in deals and fine-tune the information legal collects in its intake procedure, such as:
- What is the business trying to achieve with this agreement?
- How should this contract work?
- What are the signals that something is going awry?
- If something goes awry, what additional safety valves should legal add to protect the business?
- Once a contract is executed, what type of information should legal share with the business stakeholders managing the contract?
3. Get a little help from organization-wide technology and contract data pools.
Some highly seasoned negotiators might already use relational terms or have relationships with the business that provide a deep understanding of a transaction or deal. But to scale it and bake it into the process for the benefit of the entire organization, the business needs a shared contracting platform that the cross-functional departments will adopt and use (i.e., a platform not exclusively built for legal!).
Organization-wide contract lifecycle management (CLM) creates a single source of truth that all contract stakeholders can trust, to improve contract performance. For legal, this might mean aggregating conversations and information exchanged between the contracting parties and sharing it with legal before any drafting and negotiations are conducted. Following execution of the contract, it might mean usingobligation management toolsto monitor performance and create pools of data about contract risk and performance.
In the aggregate, legal can pool data that will improve the entire contracting process by:
- Identifying the most frequent deviations from standard clauses.
- Facilitating template or playbook modifications to address these deviations.
- Identifying repeated sticking points that continuously slow down negotiations (potentially getting business relationships off on the wrong foot)
Post-execution, legal can surface insights on contract performance to make data-driven decisions on which clauses and templates are delivering the most value and which are leading to disputes or under-performance. Given the WCC data above, clauses leading to disputes should get a hard look to determine if more accommodating, mutually beneficial language can improve the template.
The Rise of Contract Intelligence
Ultimately, companies can arrive at a place where contract intelligence becomesbusiness intelligence(another CLOC Core 12 Competency). With full visibility and continuous real-time data, legal and legal ops increase their business impact on the organization – and better yet, have the metrics to prove it.
Legal can experience efficiencies by streamlining contracting processes across the organization. But more valuable will be the data pools and business intelligence created from these more efficient workflows. Contract intelligence goes well beyond contract management. It can empower organizations to continuously improve outcomes by focusing on the "heart" of their business.